United States

FASB project updates: ASC 326, Financial Instruments – Credit Losses

FINANCIAL REPORTING INSIGHTS  | 

Following its October 13, 2021 meeting, the Financial Accounting Standards Board (FASB) provided two project updates related to its post-implementation review of Accounting Standards Update (ASU) 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.  

The first project considers (a) the proposed removal of the existing troubled debt restructuring (TDR) recognition and measurement guidance from U.S. generally accepted accounting principles for entities that have adopted ASU 2016-13, and (b) proposed enhancements to loan-modification-related disclosures. At its October meeting, the FASB decided to proceed with the drafting of a proposed ASU on the aforementioned matters. If the existing TDR recognition and measurement guidance is removed, it is expected that all loans and modifications would be accounted for based on the modification guidance in Accounting Standards Codification (ASC) Subtopic 310-20, which means that, upon modification, a company would determine whether the modification represents a new loan or the continuation of an existing loan. The proposed updates related to TDR recognition and measurement would be required to be adopted on a prospective basis, with an option to elect a modified retrospective transition approach through a cumulative effect adjustment to opening retained earnings upon the date of adoption of the amendments. The proposed disclosure-related amendments would be applied on a prospective basis.

The second project relates to ASU 2016-13’s required vintage disclosures and the consideration of whether information about gross charge-offs and gross recoveries, by vintage, should be required. The FASB decided it would draft a proposal that would require disclosure of current-year gross charge-offs by year of origination on a prospective basis. Gross recoveries were omitted from the proposed adjustment as it was concluded that (a) such information may not be as valuable to users, (b) recoveries tend to be smaller and (c) there likely would be operational complexities to gathering and disclosing such data.

Upon publication of the proposed ASUs, a 30-day comment period is expected to be provided. 

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